Japanese residential property developer Daiwa House Industry Co.(1925.TO) has been trying to derail the efforts of America's Lone Star Funds to bag the mandate to restructure failed REIT New City Residence Corp. (NRC), triggering a showdown between the two over the REIT's fate.

Attention should focus on the implied cap rates thrown out by the affair, which should set the benchmark for cap rates - essentially the ratio of earnings before interest, tax, depreciation and amortization to enterprise value expressed as a percentage for real estate transactions - on other high-quality diversified portfolios of distressed Japanese residential real estate. As entertaining as the bidding war over the delisted REIT's debt and equity is, it's ultimately a sideshow - the difference in enterprise value between the two bids is minimal.

As important: pay heed to the re-emergence of Daiwa as the rival suitor for New City in what was meant to be the closing lap of its rehabilitation process.

That Daiwa has the backing of NRC's creditors suggests not only are lenders getting more assertive but also that strong domestic companies are the favored sponsors to rehabilitate the highly regulated REIT space.

Foreigners should probably stick to searching for bargains in real estate investment and asset management in their Japanese hunt for what CB Richard Ellis describes as the greatest array of distressed real estate deals in Asia.

 
 Rehabilitation

Faced with a liquidity crunch in October 2008, residential REIT NCR filed for civil rehabilitation - the Japanese equivalent of Chapter 11 - and NCR's managers chose Lone Star in April as sponsor to oversee its rehabilitation. The U.S. private equity shop offered to buy out existing holders at Y35,000 per unit and subscribe to a Y6 billion placement for 400,000 new units/shares, which was given the nod by shareholders.

Things were going swimmingly until July when creditors, reportedly unimpressed with the low 0.65% rate the Texan distressed asset investor was offering to pay on NCR's loans, rejected New City's plan and Daiwa jumped back into the fray, proposing a rival bid that would merge NCR into Daiwa-backed REIT BLife Investment Corp.(8984.TO).

Currying favor with both equity and debt holders, Daiwa has offered to buy out unit holders at between Y40,000 and Y55,0000 on top of a Y6 billion placement, and to pay 0.9-1.% over the Tokyo Interbank Offered Rate (Tibor) on NRC's debt on a faster amortization schedule, according to local media reports. Three-month Tibor is around 0.55%.

NRC's fate will probably be decided at a second creditors' meeting on Sept. 9th. Lone Star sweetened its offer Thursday by raising the rate it is prepared to pay on the debt to 1.25-1.5% and with an accelerated repayment over five years. (http://www.ncrinv.co.jp/ir/topwhats/2009-0820-00000.pdf - Japanese language).

 
 Cap Rates

All this is good news for the equity and debt-holders but a closer look at the enterprise value implied by both deals shows just Y3.6 billion difference, or $38 million, due to the minimal value being attached to New City's equity in relation to its reappraised balance sheet. That in turn means minimal divergence in implied cap rates between the offers on NRC's portfolio, which range between 7.02% and 7.23%.

The level of attention being paid to the New City case by real estate investors in Japan suggests these implied cap rates are likely to become benchmarks for other deals.

The sudden revival of a bid from Daiwa with creditor backing after it was knocked out of the running earlier in the year meanwhile suggests lenders are more comfortable with high-grade corporates acting as sponsors for busted Japanese REITs, something DEALWATCH suggested in March this year.

One area where foreign players have had success in making acquisitions in distressed Japanese real estate has been in taking on bombed-out real estate investment managers. Cushman & Wakefield Inc. for example scooped up failed manager Pacific Investment Corp. from the wreckage of Pacific Holdings Inc.; but no foreign bidders have been revealed as successfully in the running for taking over the two REITs it backed - Nippon Residential Investment Corp. (8962.TO) and Nipppon Commercial Investment Corp. (3229.TO).

(Jamie Miyazaki is a columnist for Dow Jones Newswires covering Asia. He can be reached at +852 2832 2320 or by email: jamie.miyazaki@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. To ensure continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts, please contact investmentbanker@dowjones.com.)